Corporate: Malaysian operations to drive Astro

Last Thursday, for the first time since its Main Board debut nearly four years ago, Astro All Asia Networks plc’s shares fell below their initial public offering (IPO) price of RM4.06. Astro shares continued to slip on Friday, closing at an all-time low of RM3.94.

The stock was down 15% over a month, after several brokerages highlighted the possibility of Astro being in the red soon because of losses from its associates in India and Indonesia. This happened after Astro’s first-quarter numbers came in below street expectations on June 27. The brokerages also took heed of what Astro officials had said about their Indonesian and Indian operations – that they expect this year’s earnings to come in “flat or slightly lower” than the year before due to one-time costs, including added spending on content.

But Astro shareholders didn’t seem too perturbed. At the company’s annual general meeting last Thursday, only one question was asked on the effects of losses from Astro’s associate companies. And the shareholder said she was “satisfied” with management’s response.

“Astro officials said they would pay out as dividend 50% of the Malaysian earnings, before taking into account the start-up losses overseas. The yield is not a lot but it’s something, and there’s the prospect of a turnaround abroad in five to seven years,” the shareholder who asked the question told The Edge. She had bought more Astro shares earlier in the week when the price fell close to the IPO price.

And she’s not alone. Another minority shareholder, William Looi, said he would buy more shares to “average down” his entry cost. Looi had paid more than RM5 a share for his Astro shares two years ago, and is aware that some analysts expect the shares to go as low as RM3.60 over the next 12 months. But he says he is investing in the company’s long-term prospects.

“They tell us India and Indonesia will turn around in five to seven years. We can wait. I believe management will be able to turn the overseas ventures around. Ananda Krishnan knows what he is doing,” Looi says. He also holds shares in other A K-controlled companies like Tanjong plc, Measat Global Bhd and Maxis Communications Bhd (before it was taken private).

But is he buying Astro shares in the hope that A K will seek to take Astro private? Like Maxis, Astro has gone into a phase of expansion in nascent markets such as India and Indonesia where start-up losses would eat into earnings. It is this similarity that has encouraged speculation that A K would also take Astro private.
“A good premium is always welcome if there is a privatisation exercise, but the answer is no, I’m not banking on that. If the company is privatised, I won’t be able to participate in the company’s future,” Looi says.
Another shareholder, Janice Ong, will also consider buying more shares should the stock continue to see weakness. “Unless it’s another Transmile [Group Bhd], or should I need the money. Right now, I’m in no hurry to sell,” Ong says.

But from the way Astro’s stock price has been sliding, it seems that those who are nibbling at the stock are in the minority.

Nine of 19 analysts polled on Bloomberg currently value Astro at between RM5 and RM6 a share, and at least two brokerages still maintain target price of above RM7 a share. But there are at least six brokerages that are pricing Astro below RM5 a share, the most conservative being Citigroup’s RM3.60.

In its report on June 28, Citigroup said it values Astro’s Malaysian operations at RM3.50 based on a discounted cash flow analysis. The remaining value is the RM220 million (or 11 sen per share) book value of Astro’s Celestial Pictures Ltd – which owns the rights to the Shaw Brothers Chinese-language cinema classics film library, a unit that is currently loss-making due to amortisation charges. Citigroup also assumes that Astro’s existing cash will be reinvested in its ventures abroad, and assigns no value to these undertakings given that they are still in “the early stage”.

At least one analyst has pointed out that it is “unlikely” that Astro’s Malaysian earnings would be able to offset start-up losses from both India and Indonesia. Last year, with only Indonesia, Astro suffered RM160 million in associate losses, halving its profit to RM151.3 million for the year ended Jan 31, 2007.

But Astro’s executive deputy chairman Ralph Marshall says investors can take comfort in the strength of the company’s Malaysian operations, which currently generate between RM600 million and RM700 million in cash a year. This cash-generation capability, he says, provides Astro with the solid foundation and earnings base for further growth.
“We believe we’re able to keep the shareholders happy and at the same time grow the business,” Marshall told reporters on the sidelines of the company’s AGM last Thursday. He also said start-up losses for India will be “minimal” for the current financial year, as the operations are targeted to commence only at the end of this year.

He added that Astro’s Malaysian operations, the group’s cash cow, took close to seven years to break even. Astro began broadcasting in Malaysia with 22 TV channels and eight themed music channels in September 1996. It broke even in mid-2003. Astro Malaysia won its 500,000th pay-TV subscriber in 2000 and its one-millionth subscriber in 2003. It had just over 2.08 million subscribers as at end-April.

Astro Nusantara (Indonesia), which started broadcasting on Feb 28 last year, will need to see 1.6 million subscribers to break even. This is expected to be around 2010 to 2011, which is the fifth and sixth year from the start of operations, management says.